Looking to keep your employees happy and save on taxes? Thanks to recent legislation, setting up a 401(k) plan for your small business has never been easier – or more affordable.
In this blog, we’ll break down the key tax credits introduced through the SECURE and SECURE 2.0 Acts and why setting up a 401(k) plan may prove to be a valuable financial opportunity for your business.
Please keep in mind, you cannot claim these tax credits and deduct the plan costs as a business expense in the same year.
1. Retirement Plan Startup Cost Tax Credit
This tax credit is designed to help small businesses offset the costs of establishing a new 401(k) plan. Eligible businesses can claim up to $5,000 per year for the first three years. For many small businesses, this could mean most, if not all, of the expenses needed to establish and operate a retirement plan could be essentially reimbursed at tax time.
Tax Credit Amount:
- Businesses with 50 or fewer employees can claim 100% of qualified startup costs, while businesses with 51-100 employees can claim 50%.
- The minimum credit is $500 and the most you can receive is $5,000.
- Specifically, the credit is $250 per eligible non-highly compensated employee. So a business with 10 eligible employees would get a $2,500 credit, while a business with 30 eligible employees would be capped at the $5,000 maximum credit.
Eligibility Requirements:
- The plan must be either a 401(k), profit sharing, defined benefit plan, SEP, or SIMPLE IRA.
- Your business must have 100 or fewer employees who earned at least $5,000 in the previous year.
- The retirement plan must have at least one non-highly compensated employee participant.
- In the past three years, employees must not have received retirement benefits by another plan sponsored by your business.
Qualified Startup Costs:
- You can claim this tax credit for expenses related to establishing and/or administering the plan, as well as educating employees about it.
2. Employer Contribution Tax Credit
In addition to the Startup Tax Credit, the SECURE 2.0 act offers an additional tax credit for employer contributions made to employee 401(k), SEP, or SIMPLE IRA accounts.
Tax Credit Amount:
- Businesses can claim up to $1,000 per employee earning less than $100,000 annually for five years.
Eligibility Requirements:
- The plan must be either a 401(k), profit sharing, SEP, or SIMPLE IRA. Defined benefit plans are not eligible for this credit.
- In the past three years, employees must not have received retirement benefits by another plan sponsored by your business.
- For Businesses with 50 or Fewer Employees:
- 100% of contributions are covered in the first two years.
- 75% is covered in year three, 50% in year four, and 25% in year five.
- For Businesses with 51-100 Employees:
- The same as above applies; however, the credit is reduced by 2% for each employee over 50. For example, a business with 80 employees would receive 40% of employer contributions in the first two years, 30% in year three, 20% in year four, and 10% in year five.
3. Auto-Enrollment Tax Credit
Adding an automatic enrollment feature to your 401(k) plan can bring even more tax savings.
Tax Credit Amount:
- Eligible businesses can claim a $500 tax credit for adding auto-enrollment to a new or existing 401(k) plan.
- The credit is available for the first three years the feature is in place.
Eligibility Requirements:
- This credit applies to businesses with 100 or fewer employees earning at least $5,000 in the prior year. Unlike the startup tax credit, they do not have to be non-highly compensated employees.
Future Considerations for Auto-Enrollment:
Starting in 2025, most 401(k) plans will be required to have auto-enrollment. Adding this feature now can help you take advantage of the credit while avoiding potential disruption down the road.
The Benefits of Starting a 401(k) Plan Now
The enhanced tax credits provided by SECURE and SECURE 2.0 make it more affordable than ever to start a 401(k) plan.
By taking advantage of these tax credits, small businesses can reduce the out-of-pocket costs of starting and maintaining a retirement plan, especially during the critical first five years. And in addition to the tax benefits, small businesses also reap the rewards of happier, more engaged employees through profit sharing.
If you’re looking for a 401(k) provider who can help get you started, consider Marshall 401(k) and contact us to get started today.
